A basic aim of the Dodd-Frank reforms is to shrink the banks. Reformers don’t usually say that out loud — but imposing tougher capital requirements, reining in proprietary trading and the like will create a smaller, tamer, financial sector.

Lobbyists warn darkly that reforms may “hurt profits” or “curtail innovation” — but that is the whole point. Since at least 1995, the finance sector could do pretty much what it pleased. Bankers made freight cars of money and blew up the world. It was a glorious time to be a financial executive, but pretty hellacious for everybody else.

In fact, banks are shrinking anyway, without much help from Dodd-Frank. After all, a financial bubble means that financial assets are overvalued, that markets are too much like casinos and that the bubbelized sector has gotten far too big. Since the Great Bubble of 2005-2007 was global, its implosion should force the global banks to shrink proportionately.

That doesn’t mean we should slow down on Dodd-Frank. Until reforms are in place, actually, a shrinking financial sector could become more dangerous. But first, the scale of the shrinking:

The year 2008 marked the depths of the crash. Household names like American International Group either disappeared or were put on government life support. Even the healthiest banks, like Goldman Sachs and JPMorgan Chase, understood that they survived only at the government’s behest. Twelve big U.S. banks and investment banks were collapsed down to just six.

To the surprise of analysts, the very next year was one of the banks’ best ever. At the six survivors, Citi, JPMorgan, Bank of American, Wells Fargo, Goldman and Morgan Stanley, their combined revenues were higher than at the 12 predecessor institutions in 2006 — the last full bubble year.

But it was a bloom-in-the-hothouse kind of success. Consider JPMorgan. In 2009, its “net interest margin” was a spectacular 77 percent — lendable funds cost the bank just 23 cents for every dollar of interest it earned. Back in 2006 and 2007, Morgan’s funding costs had averaged 64 cents for every dollar of interest earned. That drop in funding cost alone was worth more than $27 billion of hard cash to Morgan. It was a gift from Uncle Ben Bernanke at the Federal Reserve, who had expropriated it from America’s numbskull thrifty-saver class.

Goldman racked up $34 billion in trading revenues in 2009, its best year ever. But no genius was involved. Traders bought short-term funds for almost nothing and used them to buy oceans of safe medium-term government bonds. Three percent return for near-zero costs adds up. The bankers decided their mojo was back — and revved up their bonuses.

But look what’s happening now. January-June revenues at those same six banks are down roughly 12 percent from 2009, while expenses are up at almost the same rate.

But you have to look behind the numbers to see how bad it is. In 2009, the banks were incurring huge “credit provision” costs to set aside reserves against the toxic waste still on their books. Credit provisions are much lower in 2011. Stripping out provisions, we see that true first-half operating earnings have shrunk from $114.2 billion in 2009 to only $69.1 billion now, a 39 percent drop.

There is no sign of an early turnaround. There is some merger activity, but nothing like the frenzied pace of the bubble years. Housing markets are dead, consumers are cutting back. Bernanke is still keeping the cost of funds low — but competition has pushed down lending spreads.

Trading profits have been hit hard. All fixed income instruments rise in price when yields fall. (If you own a long-term bond that pays 10 percent, you will make a big capital gain if rates fall to only 5 percent.) Today’s working traders all cut their teeth during a 25 year cycle of steadily falling yields. Smart traders could make tons of money in such an environment — and even dumb ones could do pretty well.

Flat rates make trading dull — and rising rates will make it scary. Bernanke can keep rates bumping along near zero for a while. But sooner or later they must start rising.

Add in the turmoil in the Eurozone, and the visible softness in China, and banking looks pretty unattractive. Goldman’s 2010 pretax was lower than in 2006 — but its headcount is 9,000 higher. Like many other banks, it’s planning big staff cuts.

That brings us to the dangerous part. Banks in trouble start pouring on the risks. Exchange Traded Funds were a useful recent innovation, because they allowed investors to invest in indexes — like the Standard & Poors 500 — and trade it like a stock. But financial houses are now pumping out hundreds of new ETFs, many of them highly leveraged, tracking obscure indexes, and often tracking them badly. Inevitably, a lot of investors will get badly burned.

For several years, commodity traders have been accused of purposely running up oil, corn and metals prices. While there seems little doubt that traders added to the momentum during price bubbles, wise heads pointed out that banks aren’t storage companies. The only way to force a rise in a commodity’s price is to hoard it — which requires huge amounts of storage.

Well, guess what? For the past year, banks like Goldman, Morgan Stanley and Bank of America Merrill Lynch have been buying up commodity storage capacity. They couldn’t have any evil purposes in mind, could they?

In short, this is no time to pull back on the re-regulation push. As bankers see their profits drop, they’re apt to take bigger risks to juice up returns and bonuses — regardless of what happens to the rest of us.

Charles R. Morris, a former banker and lawyer, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.”